STATE FOR EAP/MLS, H, DRL/ILCSR--MITTELHAUSER,
EEB/TPP/ABT--CLEMENTS, EEB/ESC/IEC/ENR, OES--SALZBERG, AND
G/TIP--LAGON AND NEUMANN
BANGKOK FOR USAID--KISSINGER, FCS--BACHER, FAS--MEYER
HANOI FOR FAS--WADE AND RALPH, FCS--NAY
HO CHI MINH CITY FOR FCS--MARCHAK AND LE
AGRICULTURE FOR FAS--RIKER
LABOR FOR ILAB--LI
COMMERCE FOR ITA/OTEXA--D'ANDREA, ITA/MAC--MIKALIS
TREASURY FOR INTERNATIONAL AFFAIRS--WALSH AND CHUN
STATE PLEASE PASS TO US TRADE REPRESENTATIVE FOR BISBEE AND
WEISEL
STATE PLEASE PASS TO US TRADE AND DEVELOPMENT AGENCY FOR
WINKATES

1. (SBU) Summary: Building the political and economic
foundation for economic growth and development was the key
theme of a November 25-29 visit by Senator Maria Cantwell
(D-WA). Cantwell, a member of the Senate's Finance and
Energy Committees, brought her private sector experience to
bear in her conversations with government officials, civil
society leaders, and businesspeople. Foreign investors care
about human rights, trafficking in persons, and corruption in
the countries where they invest, she told a receptive
Interior Minister Sar Kheng. Economic and business leaders
described Cambodia's macroeconomic success and effots to
reform public finances. They thanked the Senator for her
co-sponsorship of the TRADE Act, describing the
precariousness of the garment industry and explaining that
the excellent working conditions in Cambodia's garment
factories were not enough to guarantee the survival of the
industry. The Senator and her delegation also visited with
Washington State NGOs working in health, education,
trafficking in persons, and cultural preservation; and
visited a demining site. With on-the-ground experience in
Cambodia to complement her relatively large number of
Cambodian-American constituents, Post has high hopes that
Cantwell will promote increased U.S.-Cambodian ties in her
home state and in the nation's capital. End Summary.

2. (SBU) Political freedoms and reforms are critical in
attracting investment and economic growth, Cantwell
emphasized in a meeting with Interior Minister Sar Kheng.
Some Washington State firms refused to do business in China
until it undertook economic and political reforms, and the
US-Colombia Free Trade Agreement is currently stalled in
Congress due to concerns about killings of labor leaders
there, she said. Turning to Cambodia, Cantwell praised the
Minister for his personal focus on trafficking in persons
issues, which remains a critical U.S. concern, and noted that
both the U.S. government and U.S. investors felt that
Cambodia must make additional progress in human rights, rule
of law and anti-corruption efforts. While she proudly
co-sponsors the TRADE Act, proposed legislation that would
eliminate tariffs on apparel from Cambodia and 14 other least
developed countries, the Senator asserted that the Act is
unlikely to pass Congress unless the Cambodian government is
perceived as operating transparently. The Senator
specifically encouraged the Cambodian government to pass the
long-stalled anti-corruption law, and to ensure that future
oil and gas revenues were handled transparently.

3. (SBU) The Interior Minister accepted the Senator's link
between political reform and economic growth, saying
"Strengthening the rule of law is the gateway to
development." Sar Kheng praised areas of past U.S.-Cambodian
cooperation, including counterterrorism and labor, and
acknowledged that human rights and rule of law warranted more
attention. The government has undertaken efforts to
decentralize and reform itself, he said, but the process has
been difficult, with the various line ministries displaying
varying attitudes towards that effort. The Minister
expressed anxiety over the State Department's next tier
ranking of Cambodia's trafficking in persons efforts, saying
that although bilateral cooperation remained strong, he still
could not predict how the State Department will rate
Cambodia. Sar Kheng also acknowledged that drafting and
passing a sound anti-corruption law was important, but said

PHNOM PENH 00001463 002.2 OF 004

that ensuring that the law would be properly implemented was
equally important.

4. (U) Senator Cantwell emphasized her desire to not only
strengthen the relationship between the U.S. and Cambodia,
but also specifically between her home state and Cambodia.
Washington State has the third largest Cambodian population
in the U.S. and is home to the Gates Foundation, World
Vision, and PATH (a health NGO)--all of which are active in
Cambodia. In addition, Washington State has some of the
cheapest electricity in the country because 72% of its
electrical supply comes from hydropower. Cantwell suggested
that some Washington State hydropower firms may be interested
in investing in energy-starved Cambodia. Sar Kheng welcomed
the humanitarian and health assistance from Washington State,
and was particularly eager to get Washington expertise in
developing hydropower.

5. (U) During a lunch with economics and business experts,
IMF Resident Representative John Nelmes summarized Cambodia's
overall economic good health, comparing the nation's
double-digit growth rate to recent estimates of 2% growth in
the U.S. Cambodia's macroeconomic policy was sound and
consistent, he said. However, with a highly dollarized
economy, Cambodia essentially has no monetary policy of its
own and instead adopts U.S. monetary policy. Although this is
stable, it is geared toward the slow-growing U.S. economy
rather than the rapidly expanding Cambodian one, Nelmes
noted. (Note: In other forums, Nelmes has promoted the
medium-term de-dollarization of the Cambodian economy. End
Note.) Brett Sciaroni, a prominent lawyer and head of the
American-Cambodian Business Association, cited legal reforms
and a track record of political stability as increasing
investor interest and helping to spur economic growth.
Sciaroni proudly cited next week's inauguration of a bottling
plant owned by U.S. firm Crown Holdings, the second largest
can producer in the world, as evidence of increased interest
among multinational corporations. Sciaroni also praised U.S.
efforts to promote commercial and legal reforms via the Trade
and Investment Framework Agreement.

6. (U) Nelmes highlighted Cambodia's efforts to improve its
public financial management, and Aun Porn Moniroth, Secretary
of State at the Ministry of Economics and Finance, explained
that Cambodia is in the second stage of a three-stage public
financial management reform effort. The government first
focused on increasing revenue collection, a very successful
effort in which targets were exceeded by 10-20% each year and
government arrears of USD 200 million were nearly eliminated.
Nelmes noted that customs duties were growing faster than
imports--a signal that Cambodia is making progress in curbing
the smuggling of goods and a very positive sign in a country
where more than half of the government revenue comes from
customs. The current focus, according to Moniroth, is on
strengthening the procurement capability and accountability
within the line ministries. Seven ministries--including the
Ministries of Health, Education, Agriculture and Rural
Development--have begun pilots of this program this year.
Moniroth hopes that the government will complete the third
phase--ensuring that financial resources are matched to
government priorities--by 2015 so that the government can
meet a pledge of creating an international-standard financial
management system by that date.

7. (U) Attention next turned to the intertwined issues of
the garment industry and labor. Former Cambodian Ambassador
to the U.S. Roland Eng and representatives from the
International Labor Organization (ILO) and Garment
Manufacturers Association of Cambodia (GMAC) described how
the survival of Cambodia's garment industry remains perilous,
even in the face of Cambodia's well-deserved reputation for
good working conditions. Excessive illegal strikes, which
many believe stem from the high number of factory-level
unions, cause production delays and increase costs. Unlike
in the U.S. and most industrialized countries, the average
Cambodian garment factory has 2-3 unions competing to
represent the same workers and, according to GMAC Secretary
General Ken Loo, some factories have five or more unions.
The multiplicity of unions breeds harassment and intimidation
as well as worker unrest. Econoff detailed the embassy's
efforts to address this issue by encouraging government
efforts to certify one union per factory as "most
representative." In line with international labor standards,
only the most representative union has the right to engage in
collective bargaining. Other unions can be active at
factories, though typically worker interest tends to unite
behind the more popular, and now more powerful, union,
further facilitating collective bargaining.

8. (U) Both ILO and GMAC representatives agreed that
Cambodia's high labor standards have given them some edge in
the competitive apparel market. Loo noted that Disney
removed Cambodia from a blacklist of garment producers after
the Better Factories Cambodia factory monitoring program was
implemented, and ILO representative Tuomo Poutiainen said
that Cambodia's labor reputation anchors the presence of a
few retailers, such as the Gap and Nike, in Cambodia.
Nonetheless, all present agreed that the labor standards are
only one of many factors buyers use when deciding where to
source orders. Price, quality, and delivery time are likely
even more important than working conditions. Loo noted that
while Cambodia's garment industry is set to grow by 13% this
year, the garment industry in Bangladesh--renowned for poor
working conditions and large-scale strikes--was growing by
25%, with China and Vietnam also growing by 20% or more. Loo
also detailed an emerging practice known as "internet reverse
bidding" where suppliers compete on-line at an appointed time
in hopes of securing a garment contract. This practice
encourages further cuts in already low prices paid for
garment production and often precludes working conditions
from being considered in the bidding process.

9. (U) Lack of vertical integration also hampers the garment
industry's competitiveness. Ken Loo explained that
Cambodia's garment industry is purely a "cut and sew"
operation, with fabric, zippers, buttons, and other inputs
imported from overseas. China, however, is a "one stop shop"
where fabric and necessities are produced in the same region
as the factories, allowing fast transport and easy
re-ordering. While Loo has tried to entice fabric
manufacturers to produce in Cambodia, they balk at Cambodia's
high electricity prices.

10. (SBU) Given these structural impediments, tariff-free
access to the U.S. is critical to the survival of the garment
industry, the participants noted, thanking Senator Cantwell
for her co-sponsorship of the TRADE Act. Cambodia now pays
15 to 33% tariffs on the goods it exports to the U.S., Ken
Loo said, meaning that in total dollar terms, Cambodia pays
more in tariffs to the U.S. than does France. Economist Sok
Hach stated that his think tank has estimated that if U.S.
tariffs on garments were eliminated, the number of garment
factories in Cambodia would increase by 30%, creating 100,000
new jobs and causing wages to rise. Ambassador Eng painted a
somber picture of one potential outcome of a garment industry
collapse or contraction. Eng cited a survey which showed
that 93% of garment factory workers--most of whom are young,
rural women--did not want to return to rural areas. "If
their jobs were taken away, how would these poorly-educated,
low skilled women employ themselves in the city?," Eng asked,
and then hinted that many would turn to prostitution and
potentially reverse Cambodia's progress in battling HIV and
trafficking in persons.

Comment
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11. (SBU) It would have been hard to identify a Senator more
likely to find common cause with Cambodians than Senator
Cantwell. With her working class background and interest in
energy issues, representing a state filled with
Cambodian-Americans and NGOs working in Cambodia, Cantwell
found multiple avenues for connections with Cambodian
officials, civil society, and business. Offline, the Senator
and her staff shared ideas with Emboffs designed to further
increase ties between Cambodia and Washington State,
including encouraging a Washington State University
agricultural outreach program to expand into Cambodia,
eliminating tariffs on outdoor garments--which are not
produced in the U.S.--so that Cambodian factories could
supply Washington companies such as REI, and even promoting
the use of Kampot pepper in high-end Washington State
restaurants. Post hopes that Cantwell will return to
Washington State and Washington, D.C. as an effective
ambassador for U.S.-Cambodian relations. While many
Americans' perceptions of Cambodia remain stuck in the 1970s,
Cantwell's experiences underline the great strides the
country is making in moving into the twenty-first century.